Question #1

Question:

I’m thinking about buying a house at a foreclosure sale.  I hear it’s a great way to get a bargain. But this is all new to me. Are there legal pitfalls in foreclosures I need to avoid?

Answer:

Foreclosure sales can be tricky. The first thing you need to know is exactly what kind of foreclosure situation you are entering. In purchasing a foreclosed property, you would be buying property from someone who held a promissory note secured by a deed of trust on the property and has not been paid on the note. Foreclosure can take one of two forms.

By far the most common form is the non-judicial trustee's sale. Under the power of sale provision found in most deeds of trust, the trustee is empowered to sell the property upon demand of the note holder when the debtor defaults. The trustee will record a Notice of   Default and Election to sell, giving the debtor three months to cure the default and reinstate the loan by paying what’s owed plus the costs and expenses of foreclosure. If this is not done, the trustee will then record and publish a notice of trustee's sale, at which the property will be sold to the highest bidder. The debtor has no legal recourse to get the property back once it is auctioned.

For instance, U.S. Housing and Urban Development (HUD) foreclosures typically are this type of foreclosure.

The other type of foreclosure is the judicial foreclosure. This is actually a lawsuit, in which the note holder asks the court to order the property sold to pay the debt. Typically, the county sheriff would sell the foreclosed property to the highest bidder at public auction.

From your standpoint, the principal difference between the two is that under a judicial foreclosure, the property owner has one full year from the sale date to redeem the property. That means that the property owner has one year to pay the debt and all foreclosure costs, and then reclaim the property from you. You don't lose your money, but you do lose the property.

While the property technically is saleable during this one-year period, you would face the challenge of trying to sell a property which has the possibility of going back to the owner. In addition, title insurance can be difficult to obtain until the redemption period has passed. If you plan to live in the house, you risk having to move again before the year is out.

Before purchasing any foreclosure property, consult with your tax and legal advisers for specific advice regarding your situation.

question date: 2-23-98

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